3 Mistakes When Buying a Business – Orange County Attorney Andrew Gale

Written by: Andrew Gale - Orange County - Small Business Attorney

3 Mistakes When Buying a Business – Orange County Attorney Andrew Gale (A  Processed Video Transcription)

3 Mistakes When Buying a Business – Orange County Attorney .

Hi, my name is Attorney Andrew Gale of Gale and Vallance Orange County Business Attorney. What I wanted to cover in this video is what you should avoid at all costs when buying a small business.

The Story of a Client Who Bought a Business

Earlier this week I had a call from a friend of mine who is an accountant and he had a client of his in his office and he wanted me to come over and talk to her about a business that she’d bought.  We’ll call her buyer.  The buyer had been contacted by a friend (seller) who wanted to sell a business and the business went up for sale for $30,000 and there were a couple of months left on the rent.

The friend prepared for the buyer a short one-page financial statement indicating how much the business made a month and what the basic expenses were, and the bottom line of what the profit was on a monthly basis.  Armed with that and with a bill of sale, the buyer bought the business.

When she got into the business, she realized that the representations made by the seller weren’t true and the business was losing money and she wanted to know what she could do about it.  One additional factor was a couple of months into this purchase the original lease that the seller had ended and the buyer went out and renegotiated a new three-year lease at $2,500 a month with the landlord.

So now the buyer was very upset because the business was losing money.  She couldn’t pay her mortgage or rent.  She was having a hard time paying employees and was wondering what she could do about the business, and what she could do about the landlord.  The bad news for her was probably very little.  She got stuck into a bad deal because she’d made three simple but very critical mistakes in getting the business started.

So let me just walk through these with you quickly and hope you keep them in mind if you ever get into a situation of buying a business.

#1 Mistake: No Proper Advice on the Financials

The first mistake that she made was that she did not properly review the financial statements, and/or go out and seek the advice of someone who understood exactly what would be required to put an accurate financial statement together.

I asked her whether or not she had actually met with the CPA who called me over prior to the purchase of the business, and she said no.  I asked her whether or not she consulted with a business lawyer before she signed the bill of sale, she also said no.  I said, “Well, why did you wait ’til now to talk to some advisers?”  And her answer was, “I just didn’t want to spend the money.

It didn’t seem that complicated.  I did some research on the internet and I thought I could just save myself some money.”  And it’s true; she did save herself some money in getting into this transaction.  The problem of course is that it’s going to cost her a lot more money to get out of the transaction.

So first she didn’t have any proper advice on looking at the financials.  Had she just met with an accountant, the accountant would have been able to ask for supporting documentation which would have easily told her that this business was not generating what the seller alleged it was and she wouldn’t have got into the deal.

#2 Mistake: No Business Lawyer to Assist in Reviewing the Agreement

The second critical mistake that she made was that she didn’t have a business lawyer assist her in reviewing and drafting a purchase agreement.  In a typical purchase agreement there would be terms where if the seller had made false representations, the buyer would have had recourse in terms of going back and making a claim against the seller and trying to get out of the transaction and getting out of the deal.

But rather than seeking the advice of an Orange County business lawyer beforehand, now she was seeking the business legal services and advice of a business lawyer at the end of the deal and it was probably going to cost probably more money than she’d even invested in the business to get into litigation over the matter.  So that wasn’t very good.

#3 Mistake: No Advice from Business Lawyer for the Lease Arrangement

The third mistake that she made was that she went out and negotiated the lease arrangement with the landlord without again seeking the advice of a business attorney.  Had a business attorney been involved in the transaction, it would have been entirely possible to negotiate terms with the landlord especially in this economy whereby she would have a possibility of getting out of the lease if her business had gone so good she would’ve needed to expand her move to another location, or on the downside if the business had not gone anywhere, she might have been able to negotiate a term that would have allowed her to get out of the business, that is, pay a few months of rent and then the landlord would have excused her from the balance of the rent.

But she didn’t know any of these things.  So instead of saving $1,200 or so in professional fees and business legal services at the start, now she’s lost $30,000 in the business because it’s likely to go bankrupt plus she’s now going to have a landlord chasing her for three years’ worth of rent at $2,500 a month.

All of this could have been easily avoided, and so I would strongly urge you that if you’re in the mood to be purchasing a business, please go out, hire a trusted adviser, meet with your Orange County business lawyer.  They’re going to be one of the best tools in your business toolbox that you could possibly use.  They do cost a little bit of money, but they typically will save you far more money in the long run.

Also, get integrated into your toolbox a good CPA.  It’s best for you if the CPA and the business attorney have a relationship.  But at a minimum, at least have these two advisers out there working for you.  I think you’ll be much happier as a business person and you’ll tend to make much better business decisions.  And you’ll do it sooner rather than later which will make you much happier in the long run.

I hope these thoughts were helpful and this experience of this person was helpful to you.  If you have any questions, please call us.  We’re more than happy to consult with you and give you some guidance on what should be a very happy and profitable experience for you.

Again, my name is Attorney Andy Gale, an Orange County Business Lawyer.  Thanks.

Visit Gale and Vallance Orange County Business Attorney for more information about the business legal services we offer. Click on this link https://www.incorporationattorney.com/.